Who'll Kick Greece Harder, EU or IMF?

I just wanted to put this up quickly. As we all know by now, the Greeks have finally cried uncle over their massive fiscal hole. Not wanting to say "I told you so," please visit my previous post on how the above countries have availed of or are in the process of availing of EU/IMF bailout packages. Greece now shares this fate as predicted. Included in that previous post are links back to the relevant EU/IMF pages which detail their rescue operations.

What will be of note here is how much conditionality and monitoring will be handled by the EU and IMF. This distribution of labour will be interesting since the IMF is already claiming that it should do the bulk of the work in these respects even if the EU has already prodded Greece into accepting measures to boost revenue and reduce expenditures. That is, there may be a duplication of roles. Which, of course, may not entirely be unwelcome given how Greece has used Enron-inspired accounting in the past. Certainly, there is concern that the EU is not up to sniffing out shenanigans as Greece managed to evade meaningful criticism of its accounting practices for so long. The more people watch over it intently, the more likely it is to finally toe the line. First, here is the FT quoting a former IMF board member on the administration of conditionality:

“You keep hearing in Europe that the ECB and the eurozone will set up the conditionality, and then in Washington you hear from the IMF[’s] MD that the fund will set conditionality,” Mr Lombardi said. “We are working in uncharted waters here.”

The graphic above and the relevant write-up below speculating on what sort of hair shirt Greece will be made to worn by the IMF are from the Wall Street Journal:

But hurdles remain before any checks are cut. Amadeu Altafaj, a spokesman for the European Commission, the EU's executive arm, said officials of the EC and the European Central Bank would begin preparing an opinion on whether the aid is needed. Those officials are also working with the IMF to coordinate how the loans would work. "It is not a question of 24 hours and handing over the money," Mr. Altafaj said, though he stressed the EU, not known for alacrity, would move quickly.

Greece's negotiations with the IMF, too, may not be so simple. The fund typically asks its borrowers to commit to major financial overhauls, and then doles out money over time as the country meets milestones. If the country slips, the IMF can withhold payments. The EU, as part of the euro-zone's requirements, has already put Greece on a tough three-year fiscal diet, requiring progressively narrower annual budget deficits by 2012. But the EU has little practical enforcement power, and the IMF is likely to insist that it be able to perform its traditional enforcer's role.

In other cases where European countries have gone to the fund—Latvia and Hungary, for instance—the IMF hasn't asked them to restructure their debt. But with Greece's problems deepening, the IMF may feel that a €45 billion loan isn't enough. "The IMF could decide the numbers don't hang together," says Susan Schadler, a former senior fund official for Europe. "The IMF could say it can't go for a program that won't add up—that it either requires restructuring or massive amounts of more money."

Greece is in a particular bind. Its debt last year amounted to 115% of its gross domestic product, a ratio that is growing rapidly as Athens continues to spend more than it brings in. The ratio is also growing because Greece's anemic growth rate is outstripped by the interest rates it pays on borrowings...

That means the IMF is likely to push for deeper deficit cuts, further squeezes on public salaries or pensions and tax changes that get more people contributing to government coffers. If Greece can't get a handle on its deficit, there are few options besides pleading with creditors to accept less than they are owed, analysts say.